Dividing up the casino winnings

Arthur Hirsch, The Baltimore Sun

Tens of billions of dollars have been wagered in the state's casinos since the state legalized slot machines and table games — spinning off funds for schools, the horse racing industry and local programs that have financed everything from paving and police to iPads and small business loans.

But even with all the money coming to the state — $975 million though the end of May, according to state data — some Marylanders say the bonanza expected from casinos has not materialized.

Education advocates note that the money from casinos has mainly supplanted other state funding and has not been the windfall many felt was promised — in the political rhetoric if not in the letter of the law. Statewide casino revenue also falls short of overall projections made before Marylanders voted to approve the slots program and before the recession hit.

"Obviously, the revenue coming in is good for the state," said Del. Curt Anderson, a Baltimore City Democrat who opposed legalizing casinos. Still, "there were a lot of promises made as to where the money was going to go. I don't think it's fulfilled the promises that were made."

Casino supporters, including Gov. Martin O'Malley, say the revenue is an important source of funding for the state. The governor declined to comment on the program as a whole, but his office released a statement saying that casino contributions enabled the state to maintain school budgets during the recession.

Casino funds "have certainly provided the stability for the state to weather the storm and to continue to keep its promises for education and teacher pensions," added Sen. Richard Madaleno, a Montgomery County Democrat. "There haven't been the sort of gut-wrenching reductions in K-to-12 spending that you've seen in so many parts of the country."

Maryland meanwhile has emerged as a major gambling destination, driven largely by the success of Maryland Live, which generates the lion's share of the state's casino revenue and celebrated its second anniversary Friday.

The casino, located at the back of Arundel Mills mall in Hanover, takes in $1 billion a month in bets. It is without peer in Maryland for now and nearly without peer east of the Mississippi River. It has surpassed the performance of the top casinos in Atlantic City and Connecticut; the only one larger is the slots-only Resorts World Casino New York City at Aqueduct Racetrack.

Baltimore developer David S. Cordish, chairman and CEO of the Cordish Cos., an affiliate of which owns Maryland Live, said he figured his casino would succeed, but not like this.

"A billion a month? No," Cordish said.

He credited the location — next to a shopping and entertainment complex that drew 14.5 million visitors a year before the casino opened — and unforeseen events.

Five months after the casino opened on June 6, 2012, state voters adopted a referendum that expanded gambling, including a sixth casino in Prince George's County. While that location at National Harbor — along with the nearby Horseshoe Casino Baltimore opening in late summer — will rival Maryland Live and siphon some business away, the expansion also allowed table games.

Maryland Live has generated more than $1 billion of revenue after paying off winners in its first two years. The state's next-largest casino, Hollywood Casino in Perryville, has produced about $353 million since it opened in September 2010, according to data from the Maryland Lottery and Gaming Control Commission.

Maryland Live's share of that revenue is about $476 million, which analysts estimate might translate to a profit ranging from $80 million to $119 million for the Cordish affiliate.

While declining to discuss the casino's profit, Cordish said the casino hands the state about $875,000 a day in state taxes, helps its neighbors and created more than 3,000 jobs.

"What's wrong with this picture?" he asked of critics.

Money for education

Casino gambling revenues across Maryland are split according to a detailed formula dictated by state law.

Most of the wagered money is returned to gamblers in the form of winnings, but the house keeps between a nickel and a dime of every dollar bet — $1.67 billion so far, what the state gaming agency calls casino revenue — to be divided between the casino owners and the state.

Despite the state's hefty share, the casino revenue picture is not as rosy as it was painted before Marylanders voted to approve casinos with slot machines in 2008.

Projections made by General Assembly policy analysts in 2007, before the recession, assumed that all five Maryland casinos would be operating by July 1, 2013, and overestimated how many slot machines they would operate.

The analysts estimated that 15,000 machines would be operating in five casinos by the summer of 2013, while the actual number was 6,830 machines in four casinos. And one of those casinos, at Rocky Gap in Western Maryland, only opened in late May 2013.

As a result, the state's share of casino revenue so far is less than half what was projected. For example, the analysts projected that the Education Trust Fund would take in $660 million in the fiscal year ended June 30, 2013, but the actual total was $284 million. And that included $10 million from table game proceeds, which were not anticipated in 2007.

The 2012 referendum that permitted the addition of table games and a sixth casino in Prince George's County also revised the tax rates that the casinos pay on slots while claiming a slice of table game revenue for education.

Education advocates say gambling proceeds have become a significant source education funding but point out that the money has never been used to enhance local school budgets.

So far casinos have pumped $728 million into the Education Trust Fund, according to the state gaming agency. Annual contributions have grown from $11 million in 2010 to $385 million so far this year. Meanwhile, total state funds spent on K-through-12 education grew from $5.4 billion to $6.2 billion.

That didn't mean schools were feeling more flush. The state adheres to a strict formula that dictates how much state aid each school district must receive. The total amount increased because of inflation as well as increases in overall public school enrollment and the number of low-income students. Districts with high numbers of such students receive more money per pupil.

Without gambling revenues, education advocates said, the state might have had a hard time living up to its commitment under the formula to fund schools.

"I think that gaming funds have been used to support the state budget in a time of economic downturn so that severe cuts have not been made to education," said Bebe Verdery, education director at the American Civil Liberties Union of Maryland.

But the state didn't just add the gambling money to its education outlays. Instead, that money allowed the state to allocate less from its general funds for education.

"It was used to supplant funding," said David Beard of Advocates for Children and Youth, a Baltimore-based nonprofit education advocacy group, adding that many of those supporting casinos gave the impression that the money was to allow new spending. He is grateful that the gambling money provided a buffer for hard economic times, but said it isn't doing "what it promised to enhance education."

Charlie Cooper, secretary and former president of the Maryland Education Coalition, a citizens education advocacy group, said the political rhetoric on the casino law promised more for education than the law itself was written to provide.

"It's been presented with language to make you think that the purpose of the casinos was to increase education funding," he said.

Warren G. Deschenaux, the legislature's chief policy and fiscal analyst, rejects criticism that the Education Trust Fund — established when the slots legislation was enacted — was not supposed to add to public school spending above the so-called Thornton Commission formula. Enacted in 2002, that measure added $1.3 billion to state aid to education over six years.

The casino money was allocated to reduce the amount needed from general funds, he said.

"It was never intended to be supplementary," he said. Some critics "would like to imagine in their mind it was. I get very tired of having to relitigate these assertions. They are just that — they are assertions."

Madaleno said the Education Trust Fund is being used as planned when the legislation, which he supported, was adopted in 2007, and when gambling was expanded in 2012.

"We proposed the money would go to education and it's going to education," he said. Without the casino money "we'd never be able to pay for planned rises. … "We've been able to keep all of our promises in education."

Boost for horse industry

Legislators also set aside casino revenue to breathe new life into Maryland's horse racing and breeding industry.

When voters approved gambling, some thought the owners of the state's tracks, particularly Laurel Park, would vie for a slots license to help revive horse racing. But in another setback for Maryland racing, the track's then-owner, Magna Entertainment Corp., went bankrupt and could not reach an agreement on slots at Laurel.

The state established two funds, one to bolster horse race purses with 7 percent of casino revenue, and one for "racetrack renewal" with 2 percent of the take.

According to the legislative analysts, $95 million was projected for race purses and $34 million for racetracks in fiscal year 2013. As with education, those targets were missed. Last year, the actual amount for purses was $39 million, while $11 million went into the renewal account, according to the state gaming agency.

Purses are way up at Pimlico and Laurel, averaging $250,000 per race day rather than $160,000, said Tom Chuckas, president of the Maryland Jockey Club, which runs the tracks. The Preakness purse this year was $1.5 million, up from $1 million in 2013, and money for new bonuses for Maryland-bred winners at Laurel and Pimlico has begun to spur the local breeding business, he said.

Chuckas acknowledged that the casinos have been a mixed blessing: While the money buoyed the industry, there's also more competition for the gambler's dollar.

So far, casino gambling appears to have had little effect on the state's lottery program, which reported $1.76 billion in sales in the year ended June 30, 2013, down 2 percent from the previous fiscal year but up from the three prior years.

To compete with casinos, Maryland's tracks need to be updated and offer the sorts of amenities found at sports stadiums, including better restaurants and perhaps sports bars, Chuckas has said.

Alan Foreman, general counsel for the Maryland Thoroughbred Horsemen's Association, said that "our gains have been modest," and he doesn't expect more extensive improvements until there's money coming from Horseshoe Casino Baltimore, scheduled to open in late summer, and the MGM casino in Prince George's County, which won't open until at least 2016.

At the moment, he said, "money from the renewal account isn't significant enough to have any meaning," Foreman said.

To date, the racetrack account has accumulated just under $27 million. As of late last month, most of that had been allocated in grants to help Pimlico and Laurel cover operating costs and to finance small projects at other tracks.

Foreman said he's heard an array of renovation plans for Laurel and Pimlico discussed by the Stronach Group, which owns the Maryland Jockey Club. A representative of owner Frank Stronach could not be reached for comment.

A local hand

The impact of the gambling money is much clearer and more immediate in the smaller funds used locally to provide small-business loans and community grants.

About 1.5 percent of the casino revenue — $21 million to date — has gone into a pool to aid small and women- and minority-owned businesses.

The state allows government agencies and other organizations to compete to manage the loan fund each year. Last year, the program's first year, the Anne Arundel County Economic Development Corp., along with a Baltimore asset management company that manages state assistance to small businesses and an Eastern Shore nonprofit, won the right to lend the money to businesses across the state.

Jason Kaplan, a technology entrepreneur in Columbia, used $200,000 he borrowed in October to get his MilestonePod, a fitness tracking device, onto the market four months later.

"Much of the research and development had already been done, but the loan was helpful in getting us over the finish line," said Kaplan, who secured the loan through the Anne Arundel County agency.

Kaplan's pitch resonated for Stephen Primosch, who is vice president for financial services at the agency and a long-distance runner. But it was just one of the "really cool, really inventive" proposals that the agency had to choose from in distributing the $3.3 million it received from the state.

The agency devoted 30 percent of that money to tech companies, Primosch said. The rest went to more conventional businesses, including bars and restaurants and even a "manscaping" salon.

"It was very helpful," said Mike Lawson, who used a $265,000 loan approved by Anne Arundel County Economic Development to convert a Christmas shop in Ocean City into a new restaurant, Barn 34. "What they're doing, it means something to our business community. It's a very positive thing."

Another 5.5 percent of the casino revenue — $72 million so far — was set aside for "local impact grants" to aid the communities closest to the casinos.

Some of that money has paid for new projects, but some also has replaced money that would have been spent anyway from general funds.

Cecil County officials say they've received more than $13 million so far, a third of which went to the town of Perryville, where the Hollywood Casino stands. The county has put money into land preservation, road resurfacing, trucks for the volunteer fire department and equipment for paramedics.

Al Wein, county director of administration, said some of the money has been used for operating expenses for items that were planned but not funded. He could not say how much.

About 70 percent of the $36 million Anne Arundel County received so far has been used to supplant general fund spending, acknowledged John Hammond, that county's budget officer.

The rest has been allocated by the county for such things as iPads for elementary school students, school field trips, and police officers in a new precinct near Maryland Live casino.

Hammond said the county expects to get less money next year, as the new Baltimore casino siphons money away from Maryland Live.

The house's take

After distributing winnings and paying the state, the casinos retain a significant share — about 40 percent of the casino revenue. That includes about a third of the revenue produced by slots machines and a larger share of the more labor-intensive table games.

To date, the casino share totals nearly $693 million, according to the state gaming agency. That money must cover their expenses, such as employee pay, electricity and debt payments and other demands. Whatever remains is profit.

How much profit is hard to say and may vary widely by casino.

Maryland Live's share through nearly two years of operation was about $483 million. Cordish won't say what his profit margin is, but two authorities on the casino business provide a range of estimates.

Jeffrey Hooke, a former investment banker who has consulted on gambling policy in Maryland and other states, said a standard casino profit margin is about 17 percent. Alan Woinski, president of Gaming USA, which publishes newsletters on the industry, put the figure at 20 percent to 25 percent.

That would put Maryland Live's profit in a range from $82 million to $121 million.

Woinski and Hooke were unequivocal in declaring Maryland Live a huge success.

No mystery about that, said Hooke: "It's a license to print money, everybody knows that, if you don't have any competition."

But competition is coming. Consultants estimate that Maryland Live will see revenue fall 20 percent to 25 percent after Horseshoe Casino Baltimore opens this summer 12 miles north with 2,500 slot machines and table games. The MGM casino at National Harbor in Prince George's County may take even more business away.

Cordish is taking that prospect in stride. While it will cut his top line revenue, he expects his bottom line will be fine in the long run because the latest casino law provides a state tax cut to compensate Maryland Live for the added competition.

He wished his out-of-town competitors luck, and said there are plans to continue improving Maryland Live, by building a hotel and spa to serve casino guests and adding an Asian noodle restaurant in the middle of the casino, for example.

"We're going to keep investing," he said. "That's what we do. We're not going anywhere."